Monday, April 25, 2005

How High can Google Fly ?

Who Knows! But one thing is for sure. GOOG (The Nasdaq symbol for Google) is nowhere near the end of the upmove that has carried it from its IPO price of 85 to the 224 level last week.

My market friends know that ever since its IPO I have been talking about $500 per share for GOOG by the end of 2005. This just seemed like a nice round number to me, a number that would surely attract attention (to me and to GOOG!).

But my "far out" prediction of $500 for GOOG also illustrates an important forecasting principle. You see, the biggest obstacle to making consistently good market predictions is failure of imagination.

It is a human tendency to project the present situation in markets or everything else into the indefinite future. But a good speculator makes his or her money by anticipating a change in prices that few other people can yet foresee. (If they could the market would already be at its new price and there would be no money to be made!) So to become a good speculator you must learn to exercise your market imagination. You must practice envisioning price levels and price trends quite different from those which currently prevail.

Of course your market imagination must be disciplined by good tools and technique; it can't simply be a flight of fancy or wishful thinking. You must have a good and sensible reason, one based on historical observations, for imagining a big change in the current market situation.

It is not far from the truth to say that a good speculator is an artist. He or she constantly imagines new trends and price levels which will reflect economic circumstances most other people cannot yet foresee. The speculator is in touch with his financial "muse" and his predictions are in an essential way like the inspirations and imaginings of an artist. But, as with any artist, analytical technique plays a critical role. It constrains imagination to express itself through channels known historically to work.

Now let's return to GOOG and apply some technique to discipline our imagination. Most of what follows will seem to be numerological mumbo-jumbo to the more "scientifically" inclined reader. But I assure you that such price numerology plays a bigger role in determining market movements than you can imagine.

GOOG went public at 85 in August 2004 and by early November of that year had hit 201, a gain of 136%. The subsequent reaction ended at 161 later that month. So our first target is obtained by guessing that the next move up will end once GOOG rises 136% from 161, i.e. to 379. (Not quite 500, but oh well---). Let's note something else. Subtracting 85 from 201 gives 116 points. Adding 116 to 161 gives 277 ( a likely resistance level on the way up to over 300) while adding another 116 to 277 gives 393, not too far from 379.

Now lets apply an even more bizarre projection method. The square root of 85 is 9.22. The square root of the November 201 high is 14.17, almost exactly a whole number 5 above 9.22. Adding 5 to 14.17 gives 19.17 and squaring the result gives 367.

So we have three targets obtained in three different ways: 370, 393 and 367. Let me throw in a fourth just to add to the mystery: 85 plus 288 is 373. The average of these four targets is 376 which is now our GOOG target for the end of 2005.

So, plan A is to sell near 376. But every experienced speculator knows that while such targets are fun to develop one always needs a plan B in case the market throws us a sharp curve (an American baseball term referring to a pitch which is very difficult to hit).

Plan B will be to sell GOOG if it starts to lag the market averages by (for example) failing to reach new highs when the averages do or by making lower lows when the averages are making higher lows.

Let's keep our fingers crossed and see how our best laid plans for GOOG work out over the coming months.

1 comment:

astrofibo said...

The top is in for google.